Valero Energy, which operates this refinery near the East Loop 610 Bridge over the Houston Ship Channel, processed 2.7 million barrels per day at its 15 refineries worldwide. ﻿

Valero Energy, which operates this refinery near the East Loop 610 Bridge over the Houston Ship Channel, processed 2.7 million barrels per day at its 15 refineries worldwide. ﻿

Photo: Bill Montgomery, HC Staff

Image 3 of 3

Valero Energy, which operates this refinery in Three Rivers south of San Antonio, processed 2.7 million barrels per day in the fourth quarter at its 15 refineries worldwide. ( Gary Coronado / Houston Chronicle ) ( Gary Coronado / Houston Chronicle ) less

Valero Energy, which operates this refinery in Three Rivers south of San Antonio, processed 2.7 million barrels per day in the fourth quarter at its 15 refineries worldwide. ( Gary Coronado / Houston ... more

Photo: Gary Coronado, Staff

Crude calculus trumps a run by refiners

1 / 3

Back to Gallery

Refineries roaring back to life after breaks for planned maintenance soon will soak up more of the nation's crude, but not enough to offset the record high supplies that are pulling oil prices down.

"There's too much oil, and it's difficult to find something that's going to stop this train wreck in the next 40 to 50 days," said Tom Kloza, chief oil analyst at the Oil Price Information Service.

U.S. oil companies continue to pump more oil than American industries can consume, filling the nation's storage tanks as fears mount that they're approaching capacity, which would force producers to sell oil at even deeper discounts.

Crude oil inventories have ballooned as refineries closed for seasonal maintenance in the first quarter, swelling to 458.5 million barrels, the highest level in at least three decades, according to the most recent government data. Backed-up supply helped send the price of oil to a six-year low early last week, although it staged a modest recovery by week's end.

Translator

To read this article in one of Houston's most-spoken languages, click on the button below.

As refiners complete maintenance in coming weeks and resume operations, they have every incentive to run as hard as they can. Crude prices have tumbled faster than the prices of gasoline, diesel and other refined products, offering attractive margins and encouraging refiners to process as much oil as possible.

But even operating at capacity, they won't be able to outpace the millions of barrels of oil headed to storage each day.

"We are in uncharted waters, really," said Afolabi Ogunnaike, a senior analyst at Wood Mackenzie who specializes in refining and oil markets.

Analysts expect refiners to run at record high levels this summer, processing as much as 16.7 million barrels per day, according to Wood Mackenzie projections. That's about 1.3 million barrels per day more than they are processing now, or barely enough to absorb the 1 million new barrels sloshing onto the market each day.

"Even if we stop adding to the inventory, we're still sitting on this storage we've built up over the last four months," said Peter Kucera, who specializes in oil markets and the downstream sector as an associate director at the energy data analysis firm IHS.

U.S. refiners may be able to blunt the tidal wave of oil, but they don't have enough capacity to draw down the rapidly swelling supplies significantly.

The nation has enough crude oil in storage to supply refineries for nearly a month, according to the U.S. Energy Information Administration's projections about refinery runs in March.

"We have a refining system that's maxed out, and we have production that continues to inch up," Kucera said. "It's a system that's really run out of options for additional absorption."

To resolve the supply-demand imbalance that has pulled prices down, production has to waver, and analysts don't expect that to happen anytime soon.

While oil companies have started to cut back, slashing budgets, idling rigs and deferring projects, it could take months for those measures to begin shrinking oil supplies.

"We think prices and the overall oversupply situation are probably going to stay with us up to the middle of the year," said Kurt Barrow, an analyst at IHS, noting that domestic oil prices in the meantime could tumble below $40 per barrel.

U.S. benchmark West Texas Intermediate crude ended last week's trading at $45.72 per barrel.

The rig count fell again last week, and the Energy Department reported that production has begun to taper off in three U.S. shale regions - the Eagle Ford in Texas, the Bakken in North Dakota and the Niobrara in Colorado, Wyoming, Nebraska and Kansas - but overall output is expected to climb slightly in the next month because of more efficient drilling.

The oil price free-fall has been a boon for refiners, which responded to plunging prices by pushing their operations to the limit when they weren't down for the scheduled maintenance called turnarounds. That maintenance typically occurs in the first quarter, when gasoline and diesel demand is low.

In the fourth quarter of 2014, San Antonio-based Valero Energy's refineries operated at 98 percent of their capacity, processing about 2.7 million barrels per day.

"That's pretty high," Valero spokesman Bill Day said. "Margins were really good in the fourth quarter, and you want your equipment running so you can capture those margins."

Tesoro, also headquartered in San Antonio, set a record daily production level last year, processing 825,000 barrels per day on average, or 97 percent capacity.

And Findlay, Ohio-based Marathon Petroleum Corp., which operates a refinery in Texas City, ran at 96 percent capacity in the fourth quarter, processing about1.6 million barrels of crude per day.

Refining operations slipped in recent weeks as refineries closed their doors to retool, inspect and prepare to make summer-blend gasoline. But with those turnarounds coming to a close, refinery runs are expected to begin increasing again in April and peak in the summer driving season.

The higher refinery output should add to the relief at the retail gasoline pump that has benefited motorists even as oil producers bemoaned the drop in prices for their product.

Gasoline prices had started to climb when crude prices stabilized in the $50-per-barrel range and fewer refineries were churning out fuel, but now that oil prices are falling again and refiners are hitting their stride, a flood of fresh gasoline and diesel should force down the cost of a fill-up.

Kloza said regular could fall back below $2 per gallon in Houston and some other parts of the nation.